This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

April 1, 2013

Health Care Cost Discrepancies

In his article, Why is
American Health Care So Ridiculously Expensive?, journalist Derek Thompson
attempts to present explanations for why, in a 2012 report by the International
Federation of Health Plans comparing the average price of 21 different medical
procedures in 25 countries, the United States
ranked most expensive in all 21 categories, often twice or even three
times more expensive than the runner-up. Thompson claims that the two primary
reasons for the drastic difference in cost between American healthcare and the
rest of the world stems from two primary sources: the fact that the government
does not manage the prices charged for medical procedures, and the claim that "the complications created
by our for-profit system adds tremendous costs." However, after thinking
through his claims and applying basic economic principles, I have arrived at
the conclusion that Thompson has little grasp on the true forces at work in the
healthcare systems of both America and the rest of the world.

Let us
begin by looking at Thompson's first claim. In his article, Thompson writes,
" the U.S. is unique in our reliance on for-profit insurance companies to
pay for both essential and elective care. Twenty cents from every $1 goes, not
to health care, but to 'marketing, underwriting, administration, and profit',"
and goes on to conclude that "In a system where government doesn't
negotiate prices down, prices will be higher." Both of these points show a
complete lack of understanding of basic economic principles. The result of having
multiple privately-owned insurance companies competing is that fees paid by
American consumers for their insurance policies will be bid down in an attempt
to undercut competition.

Even
more telling is the fact that the author has seemed to reverse the
cause-and-effect of medical insurance cost of medical procedures: an increase
in the cost of medical procedures would logically lead to an increase in the
cost of insurance premiums, not the other way around. As to the question
government management, while it is true that the governments of many other
countries have succeeded in using force to keep the costs of medical procedures
down, Thompson reluctantly admits the inevitable result of such intervention; namely
that in those countries there are significant shortages in medical care and
marked decrease in medical innovation compared to the United States.

Thompson's
second claim, that "the absurd complexity of U.S. health care creates its
own costs," reasoning that "All these systems require another
inefficiency -- the existence of compilers, middlemen who compile the bills
doctors submit and shuttle them thru the payment system," once again make
a faulty connection. The hiring of these "compilers" would result in
increased insurance premiums, not in increased prices for the procedures
themselves. As Thompson clearly states, the increase in cost comes purely from
the increased difficulty in processing the procedure's bills, not from an
increase in the cost of the procedure itself.

So
then, what could serve as an explanation for the still quite real price discrepancy
between the price of American healthcare services and those offered by other countries?
I believe the key lies, as stated above, in the use of force. Out of all of the
countries surveyed for the report, only the United States eschews the use of government force to determine the
price of medical procedures. Therefore, the prices offered in America are much
more accurate representations of the true cost of the given procedures then any
price quoted elsewhere. And as a result, "American health care is the
world's envy in some categories, especially in cancer care, wait times, and
access to new technologies" while patients in other countries have to wait
months or even years to receive treatment. Who is truly better off: the cancer
patient that has to pay more, but can get medical treatment immediately, or the
cancer patient who pays less, but has to wait years to begin treatment?